Security of Payment in Australia: Getting Paid on a Building Job

Cash flow has been called the very lifeblood of the construction industry, and the phrase is not rhetorical. A subcontractor who is not paid in month three cannot pay his own suppliers in month four, and the failure travels down the chain faster than any court could travel up it. The traditional response — sue for the money and wait two years for judgment — is no response at all to a business that will be insolvent by Christmas.

Australia's answer, adopted in every state and territory, is security of payment legislation: a statutory scheme that entitles a party who has carried out construction work to make a payment claim, obliges the other party to respond within a very short period or lose the right to dispute it, and provides for rapid adjudication by a person appointed for the purpose. The determination is enforceable as a debt within weeks. It is also expressly interim: the parties' final rights are unaffected, and the money can be clawed back later in court or arbitration if the determination turns out to have been wrong.

"Pay now, argue later" is the slogan, and it is accurate. What follows is how the mechanism actually works, the deadlines that decide who wins, the limited scope for challenging a determination, and the errors that cost respondents the most money.

Eight statutes, two models, one warning

There is no national security of payment Act. Each state and territory has legislated separately, and while the schemes share a family resemblance, the differences are operative rather than cosmetic. The time to serve a payment schedule differs. The content requirements for a payment claim differ. The treatment of reference dates differs, and has been amended in some jurisdictions since the leading cases were decided. Residential owner-occupier work is excluded in some places and not others, and the excluded categories — mining, certain professional services — are not identical.

The consequence is that no general description of the scheme, including this one, is a substitute for reading the Act that governs the site. What follows describes the model in force on the eastern seaboard, which covers most Australian construction work, and flags where the traps lie.

The mechanism

Step one: the payment claim

A person who has undertaken to carry out construction work, or to supply related goods and services, may serve a payment claim on the person liable to pay. The claim must identify the construction work to which it relates, state the amount claimed, and — in some jurisdictions, and this has been fertile ground for argument — state that it is made under the Act.

The claim must be served within the period the Act allows, calculated by reference to the contractual payment machinery and the statutory entitlement to progress payments. The High Court's decision in Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) 260 CLR 340 confirmed that the statutory preconditions to a valid payment claim are jurisdictional: get them wrong and the whole chain that follows is void, however meritorious the underlying claim. The particular precondition considered in that case — the existence of a reference date — has since been recast in some jurisdictions, but the wider lesson has not changed. These are not technicalities that a sympathetic adjudicator will overlook.

Step two: the payment schedule, and the trap

The respondent must reply with a payment schedule within the time the Act allows — ten business days in several jurisdictions, sometimes less under the contract. The schedule must identify the payment claim, state the amount the respondent proposes to pay, and, where that is less than the amount claimed, state the reasons for withholding payment.

Two consequences follow, and between them they account for most of the money that changes hands under these Acts.

No schedule, no defence. A respondent who fails to serve a payment schedule within the period becomes liable to pay the whole of the claimed amount. The claimant may then recover it as a debt due in court — where the respondent is precluded from raising any defence relating to matters arising under the construction contract — or proceed to adjudication. A payment claim ignored for eleven business days is, in commercial substance, an invoice that has become a judgment.
Reasons not stated are reasons lost. A respondent cannot rely in the adjudication on a reason for withholding payment that was not included in its payment schedule. The defective workmanship discovered after the schedule was served, the back-charge nobody had quantified, the set-off the commercial manager thought was obvious — none of them can be run if they were not written down in time.

The practical advice for respondents is therefore unromantic and absolute: never miss a payment schedule, and never draft one narrowly. Every reason for withholding, however provisional, belongs in the document.

Step three: adjudication

Where a schedule is served for less than the claimed amount, or where the scheduled amount is not paid, the claimant may apply for adjudication within the period the Act prescribes. The application goes to an authorised nominating authority, which appoints an adjudicator. The respondent lodges an adjudication response — confined, as above, to the reasons already given — and the adjudicator must determine the amount payable within a short statutory period, typically measured in days rather than weeks.

The determination fixes the adjudicated amount and the date for payment. If it is not paid, the claimant obtains an adjudication certificate and files it in a court of competent jurisdiction, where it takes effect as a judgment debt. The respondent who wishes to challenge it must generally pay the adjudicated amount into court as a condition of doing so.

Challenging a determination

Adjudicators work at speed, on incomplete material, often on complex facts. They make mistakes. The question is which mistakes a court will correct.

The High Court answered it for the New South Wales Act in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1, holding that the Act excludes judicial review for non-jurisdictional error of law on the face of the record. An adjudicator who misconstrues the contract, or misapplies the law of damages, has made an error the court will not correct. What survives is review for jurisdictional error — where the adjudicator has determined something he had no power to determine, failed to comply with an essential precondition, or denied the respondent natural justice in a material respect.

The rationale is the scheme's interim character. Because the determination does not finally decide anything, and because the loser retains the right to have the dispute resolved properly in court or arbitration, the legislature was entitled to accept a degree of rough justice in exchange for speed.

That is worth holding onto when advising a respondent who has just been ordered to pay a sum he regards as indefensible. The money must generally be paid. The argument is not over — but it will be conducted in different proceedings, on the respondent's own initiative, and with the cash already gone.

Retentions, trusts and insolvency

The scheme's weakness has always been the claimant who wins an adjudication against a head contractor that then fails. Several jurisdictions have responded with statutory trust arrangements over retention money and, in Queensland, over progress payments in defined circumstances, so that the funds do not form part of the insolvent contractor's general assets. Where such a regime applies, a subcontractor's position on insolvency is materially better than that of an ordinary unsecured creditor — and a head contractor's obligations to account are correspondingly strict.

Conversely, where the claimant is the party in liquidation, its ability to use the scheme at all may be restricted, on the footing that a statutory mechanism designed to protect cash flow has no work to do for a company that has ceased to trade.

Practical discipline

For claimants:

Serve payment claims regularly and on time, in the form the governing Act requires, and keep proof of service. Service by the wrong method to the wrong address defeats an otherwise perfect claim.
Diary the adjudication window the moment a schedule arrives or fails to arrive. These periods are short and unforgiving.
Support the claim with the material an adjudicator can actually use within days: marked-up drawings, site records, measured quantities, correspondence. An adjudicator with no time cannot construct your case for you.

For respondents:

Treat every payment claim as a document with a statutory deadline attached, and put the deadline in a system rather than in somebody's inbox.
Draft the payment schedule comprehensively and defensively. Include every reason, quantify every set-off, and never assume a point is too obvious to state.
Where a determination has gone against you, take advice quickly on whether the error is jurisdictional. If it is not, the money is payable and the argument moves to another forum.

The legislation is often criticised as favouring claimants, and in a sense that is precisely what it was designed to do: the risk of a wrong determination was deliberately allocated to the party holding the money rather than to the party doing the work. Respondents who administer their contracts properly are rarely caught by it. Those who treat a payment claim as an invoice to be dealt with when convenient are caught by it repeatedly.

For the equivalent statutory adjudication regime in the United Kingdom, Hong Kong and Singapore, see our guide to construction adjudication. If the underlying dispute is contractual rather than procedural, our guide to breach of contract in Australia sets out the remedies and the limitation periods. And if a payment claim or a determination has landed and you need to work out what the governing Act requires of you and by when, CommonBench's Legal Chat can take you through it.

This article is published by CommonBench for informational purposes only and does not constitute legal advice. If you are owed money on an Australian building job, or have been served with a payment claim, the deadlines are measured in business days — try CommonBench for AI-powered legal research with verified citations across five common law jurisdictions.